Treasury leans on cheap short-term bills to fund $2 trillion deficit, sparking debt-risk warnings

In minutes published on Aug. 5, the Treasury Borrowing Advisory Committee warned that the United States could face a $1.45 trillion funding shortfall in fiscal 2027-28 if current auction sizes persist. Treasury Secretary Scott Bessent has been aggressively selling short-term Treasury bills, which now yield roughly 3.8%, to finance an annual deficit close to $2 trillion and keep reported borrowing costs low. While this approach lowers current interest outlays, it leaves the Treasury more vulnerable to higher inflation and rising long-term rates, which have climbed above 5% for 30-year bonds.

The committee noted that interest expenses rose by $120 billion this year, pushing total annual interest payments past $1 trillion. Experts such as Jon Hilsenrath caution that the growing reliance on Treasury debt could become a flashpoint in any future financial stress. A further risk emerges from the Federal Reserve under Chair Kevin Warsh, which plans to shrink its balance sheet and may shift holdings toward shorter-term securities, potentially reducing demand for the long-dated Treasury supply the Treasury is now adding.